«3 Chapter Distributive Bargaining T he negotiation model known today as distributive bargaining was first identified by R. E. Walton and R. B. ...»
Unfortunately none of the three foresaw what then happened. The daughter listed her home well above its market value and it took 18 months to sell. During the first few months, she moved into their parents’ home. The contract had not included any specified maximum period of time to closing, or who would pay the utilities and taxes until the closing, or if any “rent” should be paid by the daughter during what became 18 long months of escalating tension among the three siblings. By the time the daughter did sell her house, these issues caused bitter feelings among the three.
The two other children believed they had lost at least $12,000 each due to the length of the process. If, in addition to price, a contingency contract had been negotiated, the three siblings might easily have avoided a great deal of anguish. For example, the contract on the house could have included a standard clause requiring closing at the agreed-to price within 90 days, and a contingency clause could specify that if the daughter did not sell her house within 90 days she would owe a specified amount of rent, plus utilities and taxes to be paid at the closing. The clause might also specify a maximum period of two years for the closing, after which the house would be put on the market.
Contingency contracts can be valuable in many negotiation situations if any future event will likely alter the outcome of the negotiated deal. In a noted Harvard Business Review article, researchers Max H. Bazerman and James J. Gillespie cite several possible benefits of using a contingency contract, as follows:28
• The parties can counter negotiation biases by including future scenarios predicted by each party (such as mortgage rates in 12 months), and then letting future events decide which was correct.
• An impasse can be avoided by allowing the outcome of a future event to determine a critical portion of the agreement. For example, Bazerman and Gillespie recall when negotiations between a television production company and an independent station broke down over different expectations of the ratings of the show in question, with each ratings point worth about $1 million. A contingency contract could have specified that a $1 million license fee per ratings point, as determined by the Nielsen ratings on a specified future date, would be paid per the terms of the contract.
• It can motivate parties to perform at higher levels. For example, in the estate house dispute just discussed, a contingency contract may have motivated the daughter to sell her own house at a lower price or spend more time and effort fixing it up before she put it on the market—to avoid paying rent and other expenses after the 90-day period.
Chapter 3 Distributive Bargaining
• The potential risk involved can be shared by the parties, rather than specifying an outcome at the present, when uncertainty about future events may make them uneasy about their level of risk. Retailers, for example, often share the potential risk of unsold products through contingency contracts with vendors by agreeing to rebates on unsold inventory.
Bazerman and Gillespie also point out that contingency contracts may not be right in every situation due to their potential limitations. First, they require a continuing relationship between the parties, which might not always be possible. Second, they may not be easily enforceable, and court costs can be prohibitive. And third, they require transparency—the future event must be easily and objectively measured and not subject to manipulation by either party.29 Let us now return to the Chapter Case. The bargaining situation is illustrated in Figure 3.6, including a summary of the negotiations. The seller listed her initial price or opening offer at $12,500 and the buyers made an opening offer of $7,500. The parties then decided, but kept confidential, their bottom line or reservation price. The seller decided she could accept no less than $8,000 and still realize a reasonable profit. The buyers decided their absolute limit was $11,000. Thus the range of possible settlement amounts, or zone of possible agreement (ZOPA), became $8,000–$11,000—although neither side could know the range since neither knew the other party’s reservation price.
So how might this classic distributive bargaining situation have been settled?
Because the buyer made the first verbal offer of $7,500, it is likely that the seller would make the first counteroffer. She would likely utilize the good faith bargaining norm and decide to show her willingness for give-and-take by making a counteroffer
78 Chapter 3 Distributive Bargaining of $11,000, and frame her offer with, “I’m very pleased that you are sincerely interested in Sunday. I know you have looked at it before. But this work is similar in size, detail, and content to three others that I sold in this price range over the last year, all with about the same number of hours invested. Also, I consider it to be one of my best paintings. For you I’m willing to come down $1,500, to $11,000.” By citing the number of hours she has invested in the painting, the seller brought the need norm (see p. 67) into the negotiation. The buyers realize that $11,000 is their reservation price, and if they are particularly anxious to close the deal, or perhaps if they are inexperienced negotiators, they might agree to $11,000. But they likely would rely on the equality fairness norm and offer to split the difference of $3,500 ($11,000–$7,500) and thus offer $9,250. They would decide to make this offer because it is an equal sacrifice by both parties, and because it’s not a round number and is based on a defensible position, which makes them more comfortable in offering it to the seller. Since the new counteroffer of $9,250 is higher than her reservation price, the seller might accept it if she was significantly motivated to sell. Or, she might decide that since the buyers have only made one counteroffer, they have not made their “highest and final offer,” and thus she offers to make a second, but smaller, concession of $1,000, again noting that the work is similar to others that sold at higher prices. At this point the buyers might agree to her second counter of $10,000, and thus close the deal. Both parties will likely believe they have negotiated a “good deal.” The seller gained $2,500 over the buyers’ opening offer, and realized $2,000 more than her reservation price. The buyers also perceived they gained, because the final price was $2,500 less than the listed price, and they paid $1,000 below their reservation price.
SUMMING UPThink about the next negotiation situation in your personal life or at work. Can it be categorized as a distributive bargaining situation?
If two parties are primarily negotiating a single issue such as price, and if each intends to maximize their outcome and the likelihood of a continuing future relationship is small, then consider it a distributive situation and prepare yourself by answering the following questions.
1. Describe the situation. What is the primary issue to be negotiated?
2. What do you expect will be the opening offer by the other party (listed price, last year’s price, and so forth)?
3. How can you best anchor your opening offer in the mind of the other party?
(With facts, an extreme offer, past precedent, or something else?) What will be your opening offer?
Chapter 3 Distributive Bargaining
4. What is your resistance point?
5. What is your best guess of the resistance point of the other party?
6. Given the answers to questions 4 and 5, what is the estimated ZOPA?
7. Which of the norms presented in this chapter (Fairness: equality, equity, need;
Reciprocity; Good faith; Maintaining the status quo) are you most likely to use in deciding and stating your offer(s)?
8. Can you anticipate how you might reframe the position of the other party?
Ask why: _______________________________________________________________
Ask why not: ___________________________________________________________
_ Ask what if: ____________________________________________________________
Ask for advice: __________________________________________________________
9. How can you best defend against an excessive anchor set by the opening offer of the other party?
10. Do you have a possible future relationship with the other party? If so, how should you protect it while negotiating this exchange?
LEARNING EXERCISE: BUYING HOUSEA The purpose of this exercise is to apply the five negotiation skills presented in this chapter to an actual negotiation situation. You wish to buy a home in a particular neighborhood because you like it and it is in the best school district. Your family needs at least four bedrooms, 21/2 baths, and a two-car garage. At this time you have twice viewed one house that meets all of your needs and is located at 5656 Valley Oak Court. Your agent has provided you with the information on this house as well as five other houses in the neighborhood (A through E in the table below) that meet your criteria and have sold in the past year. The house on Valley Oak Court is listed
for $329,000. Review the following information and answer these skills questions:
Skill 3.1: Is this a distributive bargaining situation? Why or why not?
Skill 3.2: How will you determine your reservation price?
Skill 3.3: What initial offer should you make to use bracketing and achieve your target price of $310,000?
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